Tax Advantages Real Estate Investors Can Take Advantage Of

A 2017 recent real estate survey found that since 2000, real estate investments outperformed the stock marketing about 2-to-1, providing an over 10.71% annual return as compared to 5.43% with the S&P 500 Index. Not only can investing in real estate be a lucrative idea, but it comes with a number of tax advantages too.

 

 

Tax Benefits Of Real Estate Investment

Lower Capital Gains

When making longer term investments in properties, the profits made fall under long-term capital gains, which according to your income bracket, are taxed anywhere from zero to 20%. This is important when deciding on purchasing that Brampton home for sale. When investing for the short term such as flipping a house, you won’t realize any special tax benefits as your gains will be taxed at a higher, short-term rate. Obviously, as an investor, long-term capital gains is the way to go as you’ll be taxed significantly less and can utilize previous deductions to lower the total amount that’s taxable.

Deductions

While the exact deductions and amounts can change with tax laws, they’re generally the biggest tax benefits for a real estate investor. The write-offs are typically geared toward rental properties and include the costs associated with property tax, interest on a mortgage loan, depreciation, repairs and expenses. For example, if you manage a property, you can deduct necessary expense for maintaining and managing it which can also include advertising, maintenance, utilities and more. As repairs are necessary for keeping a property well-maintained and don’t add value to it, things, like replacing broken screens, painting and fixing leaks, can usually be written off.

Of course, it’s important to itemize deductions carefully, and if necessary, hire a tax account to make sure all tax laws are followed.

Depreciation

A big break when it comes to rental property investments is depreciation. That basically means that you’ll recover the cost of income producing property through annual tax deductions. That deduction, according to the IRS, is defined as an allowance for wear and tear, with multiple factors determining how much can be deducted. That includes how much the property is worth, the recovery period, and method of depreciation that’s used. Most investors use what’s referred to as the Modified Accelerated Cost Recovery System, or MACRS. Investors are allowed to deduct depreciation on residential property for 27 years and six months. For commercial property, it’s 39 years. As investors are already deducting the cost of the rental property, a depreciation deduction provides a great way for investors to save every year.

1031 Exchange

When investing in real estate you’ll be able to take advantage of a tool in the tax code known as a 1031 Exchange. It will allow you to defer profits made when and if you sell the property when purchasing another similar property of equal or greater value. There are a number of rules to follow and criteria that needs to be met, which means it’s important to check with the IRS and/or your tax accountant, such as the exchanged property being held for productive purposes in trade or business, and if there is any property or cash received in the transaction that can’t be considered “like kind” it will be subject to taxation.